Business bankruptcies and the WARN Act

Despite some mildly positive jobs numbers for January, we're still getting calls from many business owners who are considering bankruptcy here at Shenwick & Associates. In the past, we've discussed closing down a business. But there's another consideration larger companies need to take into account-the WARN (Worker Adjustment and Retraining) Act, which imposes obligations upon certain employers to provide terminated employees with a minimum of 60 days prior notice of facilities closings and layoffs under certain circumstances.

Only employers that have 100 or more employees are covered under the WARN Act. One of those businesses covered by the WARN Act was electronics superstore chain Circuit City, which filed for Chapter 11 bankruptcy on November 10, 2008, eight days after announcing a mass layoff. The employees were actually terminated on December 31, 2008, after the chain finished their going out of business sales.

One of the terminated employees filed a class action adversary proceeding (bankruptcy litigation) against the Debtor, claiming that a WARN Act claim arose on the date of termination, which would be a post-petition claim. However, the debtor asserted that a WARN Act claim arises on the date that an employer fails to give the required statutory notice of a covered employee's pending termination, which in this case would be a pre-petition claim.

The U.S. Bankruptcy Court for the Eastern District of Virginia agreed with the debtor, dismissing the adversary proceeding and holding that under the "conduct test," the claim arose when the debtor ordered the mass layoff. Therefore, the appropriate venue for the terminated workers' claims would be through the filing of claims in the bankruptcy case, not in an adversary proceeding.

For more information about the WARN Act and business bankruptcy questions, please contact Jim Shenwick.